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CX - Only when inputs are used in manufacture of final products and some of those inputs become waste during course of manufacture of final product, credit already taken in respect of such inputs wasted is not to be denied: HC

By TIOL News Service

ALLAHABAD, DEC 06, 2017: BRIEF facts of the case are that the respondent company M/s Timex Watches Limited is engaged in the manufacture of wrist watches and parts.

A team of CE Officers visited the factory premises of the assessee company on 21.12.1998. During the course of the scrutiny of the records it was observed that the company had prepared a statement regarding "RDW" (Report of Defective Work), which showed that the inputs valued at Rs.3,09,48,516/- had been destroyed as on 31.10.1998.

A SCN was issued seeking recovery of MODVAT credit involved in such inputs and the same was confirmed by the original authority.

In appeal, the assessee submitted that whether the disputed watch parts in respect of which the MODVAT credit had been availed by the assessee company had become waste during the course of manufacturing process or they were already defective before they were put to use in the manufacturing process of watches is not properly examined and the Commissioner without verification had denied the MODVAT credit.

The matter was remanded by the Tribunal and in denovo proceedings the impugned order was passed by which the Commissioner has disallowed the credit of Rs.42,53,080/- under Rule 57-I and has further imposed a penalty of the same amount under Rule 173Q.

In appeal, the CESTAT by order dated 27.5.2015 - 2015-TIOL-1782-CESTAT-DEL while allowing the appeal held -

CX - Whether inputs on which assessee have taken modvat credit have been put to use for manufacture of watches - As per Report of Defective Work (RDW), assessee initially availed modvat credit on inputs/parts of watches at time of receipt of same - before putting to use, assessee has conducted certain tests to find out whether inputs to be usable or not - Inputs which did not find fit to be used, assessee has reversed credit thereon, rest of inputs were issued by assessee for processing or assembling of watches - Defective goods were found only after inputs were issued for processing or assembling of watches, assessee is entitled to credit as per Rule 57D of erstwhile Central Excise Rules, 1944: CESTAT

Revenue is in appeal against this order and the following questions of law are referred for decision by the High Court -

(1) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the CENVAT/MODVAT Credit is admissible in respect of the inputs which were defective, unfit for use in the manufacturing of final goods & hence destroyed by the Respondent, without considering that the Respondent itself was unable to specify and identify the stage of such defect/wastage which clearly had to conclude that the inputs supplied to the Respondent were ab-initio defective inputs unfit for use in the manufacture of the final product ?

(2) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that there was no shortage of inputs on the ground that in some cases, inputs were short accounted and in some cases inputs were found in excess, therefore the shortage of one inputs gets nullified with the excess of another inputs?

The respondent assessee submitted that the conclusion arrived at by the Tribunal is purely a factual conclusion and there is no question of any point of law involved in the present appeal as required under Section 35-G of the Central Excise Act, 1944.

The High Court extracted Rule 57A(4) of the CER, 1944 -

(4) The credit of specified duty under this section shall be allowed on inputs used in the manufacture of final products as well as on inputs used in or in relation to the manufacture of the final products whether directly or indirectly and whether contained in the final product or not.

And observed -

+ On perusal of the above extracted Sub-rule (4) of Rule 57A of the erstwhile Central Excise Rules, 1944 it can be inferred that the MODVAT credit was available on inputs used in the manufacture of the final products. Further, MODVAT credit was also available on the inputs used in or in relation to the manufacture of final product whether directly or indirectly. Therefore, it is amply clear that it was not required that the said inputs should be contained in the final products.

In the matter of their submissions that the tests during which inputs were destroyed/ become waste are integral to the manufacturing process i.e. without which the inputs cannot be used in manufacturing the watches and, therefore, the testing of inputs is in relation to the manufacture of final product (i.e. watches) and the assessee company cannot be denied to the MODVAT credit in terms of Rule 57A read with Rule 57D of the Central Excise Rules, 1944, the respondent placed reliance on the decisions in Asahi India Safety Glass Ltd. -2004-TIOL-29-HC-DEL-CX and Flex Engineering = 2012-TIOL-01-SC-CX .

The High Court observed that the judgments can be referred in order to prove that the testing is an integral part of manufacturing process and MODVAT is available as per Rule 57A .

It is further observed -

"…, we find that the order passed by the Tribunal is fully justified as the Tribunal has categorically recorded the finding of fact, after perusal of the report of defect work that the MODVAT credit has been availed by the assessee company on the inputs/ parts, of the watches at the time of the receipt of the same, before putting to use and that the assessee company has conducted certain test to find out as to whether the inputs to be usable or not. In respect of the inputs which were not found fit to be used, the assessee company has reversed credit thereon and rest of the inputs were issued by the respondent for process or assembling of watches, and during the course of manufacture of watches, certain inputs were found defective during further test and certain inputs were lost while manufacturing the goods."

After extracting paragraphs 9 and 11 of the impugned Tribunal order, the High Court also observed -

+ Apart from the aforesaid it is clear that the MODVAT credit cannot be denied applying the provisions of Rules 57-D when duty has indeed been paid. In the instant case of the appellant during the period in dispute scrap valued at Rs.78,53,771/- was cleared from the factory on this scrap a duty of Rs.12,20,722/- was paid, therefore, without prejudice and in any case the benefit of MODVAT credit has to be given to the assessee company on the basis of relevant fact that the duty has been paid on scrap. It is further noticed that during the course of period in dispute the departmental officers were informed about the scrapping of process rejections on various occasions.

+ Apart from the aforesaid even the Commissioner, Central Excise has himself observed that the ripping open of manufactured watches also does not appear to be an essential requirement for manufacture as in the first place this exercise is not carried out in the manufacturing floor of the factory, as in none of the samples copy of "RDW" report the code of cause viz. Q1 & Q2 is mentioned. This effectively means that emergence of this waste is either prior or after the manufacturing process. The Q2 rejects/waste were in the nature of being emanating as result of Research & Development (R&D) process which is quite distinct from the manufacturing activity as contemplated in Rule 57A ibid.

Concluding that there is no ground to interfere with the categorical findings of fact recorded by the CESTAT, the Revenue appeal was dismissed.